SME manufacturing activity weakens

New orders growth eased among SME manufacturers in the three months to October, as domestic orders flat-lined, according to the latest quarterly CBI SME Trends Survey.

The survey of 331 SME manufacturers also reported that output growth eased, and production is expected to stall in the quarter ahead, with expectations among their weakest since October 2011.

Domestic orders growth ground to a halt, whilst export orders growth slowed to the weakest in nearly two years. The outlook for both is sombre, with domestic orders set to fall next quarter and export orders expected to be flat. The number of respondents citing political and economic conditions abroad as limiting near-term export orders rose further, remaining at its highest in two years.

Chiming with the softening in activity, growth in numbers employed eased over the last quarter, to its weakest in two years, and employment is expected to be broadly flat in the three months to January.

Meanwhile, business optimism deteriorated at the fastest pace since the wake of the EU Referendum, whilst sentiment over export prospects for the year ahead fell at one of the fastest rates since the depths of the Financial Crisis.

Over the next twelve months firms expect to cut back significantly on investment, with plans for capital spending on buildings at their weakest since July 2016. Investment on plant and machinery, training and innovation are also expected to be reduced over the year ahead.

Capacity pressures are also continuing to bite, with the proportion of firms working below capacity remaining low. A record number of SME manufacturers cited expanding capacity as a motivation for investment, and skill/labour shortages remain near their historic highs.

Alpesh Paleja, CBI Principal Economist, said:

“SME manufacturers are clearly feeling the pressure: both from softer global economic momentum, reflected in a tailing-off of exports orders, and Brexit uncertainty biting hard on investment plans.

“As a result, smaller manufacturers will have breathed a sigh of relief at the Chancellor’s package of investment incentives in the Budget, and support on business rates is also welcome.

“But the significant scaling back of planned capital spending is further proof that Brexit uncertainty is taking a real bite out of firms’ plans to grow and innovate. The Government’s number one priority has to be securing a Withdrawal Agreement with the European Union, so firms can enter the transition period and start to navigate the future with more certainty.”

Key findings – three months to October:

29% of small and medium enterprise (SME) manufacturers reported an increase in total new orders, and 25% said they decreased, giving a balance of +4%. New orders are expected to fall (-5%) over the coming quarter

26% of firms said domestic orders increased and 26% said they decreased, giving a balance of 0%, indicating no change in domestic orders on the quarter. Domestic orders are expected to decline (-9%) over the next three months

21% of firms reported an increase in export orders and 16% said they fell, giving a rounded balance of +6%. Firms anticipate export orders will be broadly unchanged (+3%) next quarter

Political/economic conditions as a factor to limit export orders (39%) rose to the highest since October 2016 (42%). The most cited factor remained prices (42%)

34% of SME manufacturers said output increased and 18% said it decreased, giving a rounded balance of +15%. Growth is expected to stall next quarter (-2%)

11% of firms said they were more optimistic regarding their business situation, while 30% said they were less optimistic, giving a balance of -19% - the sharpest deterioration since July 2016 (-44%). Optimism about export prospects for the year ahead also fell (-23%), at the fastest decline since April 2009 (-32%)

Numbers employed grew at a slower pace, with 28% of firms saying they had seen growth in headcount and 20% saying they had seen a reduction, giving a balance of +8% from +26% in the three months to July

SME manufacturers are planning to reduce their spending across the board. They expect to cut back spending on buildings (-21%) at the fastest pace since July 2016 (-24%). SMEs also expect to reduce capital expenditure on plant and machinery (-16%), training and retraining (-9%) and product and process innovation (-5%) over the next twelve months

Average unit cost growth (+41%) remained above its long-run average (+17%), but growth is set to slow somewhat (+30%) over the next three months

Average domestic prices (+9%) and average export price (+6%) growth eased (both to their lowest in two years), but growth is expected to edge higher next quarter (+16% and +13% respectively).